NBFCs to face liquidity pressure on lack of clarity on RBI's moratorium, poor collection: Crisil

Non-banking finance companies are likely to face liquidity challenges due to lack of clarity on the applicability of the Reserve Bank's moratorium on their bank loans and poor collection due to the nationwide lockdown, says a report.

According to a report by rating agency Crisil, Non-banking finance companies (NBFCs) face a double whammy because they are offering moratorium to customers despite not getting one themselves from their lender-banks.

"Given the challenges in access to fresh funding, and presuming nil collections, a number of NBFCs will face liquidity challenges if they do not get a moratorium on servicing their own bank loans and are forced to meet all debt obligations on time," rating agency's senior director Krishnan Sitaraman said in a report.

In order to tide over any liquidity stress caused by the impact of coronavirus, RBI had announced a relief package which included a three-month moratorium on payment of all term loans outstanding as on March 1, 2020.

NBFCs have sought clarity from RBI on applicability of moratorium and also on access to a formal liquidity window which may provide some structural liquidity support to them similar to that available for banks.

It said almost three-fourths of NBFCs will have a liquidity cover of over three times to meet capital market debt obligations up to May 31, 2020, when the moratorium is slated to end, while only 3 per cent have less than one time liquidity cover.

A liquidity cover of less than one time indicates inability to make debt repayments on time and in full without the benefit of collections, external support, or access to additional credit lines or funding.

If there is no moratorium on bank debt, only 37 per cent of the Crisil-rated NBFCs will have a liquidity cover of more than three times for their total debt repayments up to May 31, 2020, while those with less than one time would increase to 11 per cent, the report said.

"If business disruption continues beyond the moratorium period, considering debt repayments till June 30, 2020, almost a quarter of these NBFCs would have a liquidity cover of less than one time with debt obligations aggregating to Rs 1.75 lakh crore," it said.

Raising fresh funds is critical for NBFCs because, unlike banks, they do not have access to systemic sources of liquidity and depend significantly on wholesale funding, the report said.

In its Covid-19 Regulatory Package, RBI announced to conduct Rs one lakh crore of targeted long term repos operations (TLTRO). Bank have to deploy this liquidity in investment grade corporate bonds, commercial paper, and non-convertible debentures. However, only half of that is earmarked for primary issuances.

The rating agency said only higher-rated NBFCs may end up benefiting from TLTRO.

Mutual funds, a large investor base for higher-rated NBFCs, have been facing redemption pressure and therefore are unlikely to be a material source of fresh funding or refinancing for NBFCs, the report said.

Securitisation, which many NBFCs were relying on so far, may also not see much transactions in the near term because of the moratorium, Crisil said.

While larger and better-rated NBFCs may still be able to manage the situation, smaller or lower rated NBFCs, which have significant dependence on bank funding, will find the going extremely tough, the rating agency said.

Measures such as enhancement in bank lines, ad hoc or special Covid-19 credit lines from banks, would offer only a partial relief to the sector, it added.